Tourism Cycles And Weather Risks Will Test Earnings Before Long Term Experiences Pay Off

Catalysts

About Experience Co

Experience Co operates adventure tourism and outdoor experience businesses across Australia and New Zealand, including skydiving, marine and treetop attractions.

What are the underlying business or industry changes driving this perspective?

• Although international and domestic tourism into Australia and New Zealand is improving, the business remains exposed to any slowdown in visitor night growth or outbound travel by Australians. This could cap volume driven revenue gains across Skydiving and Adventure Experiences.
• While new and upgraded products such as the Aquarius II vessel, Remora Reef Pontoon and the upcoming Two Island tour are intended to broaden the reef offering, heavy reliance on favorable weather and marine access conditions means periods of disruption can quickly pressure load factors, average revenue per customer and segment earnings.
• Although Treetops Canberra and other identified sites suggest scope for more outdoor experience locations, the need for ongoing maintenance CapEx of A$8.1 million and additional growth CapEx for new builds may compress free cash flow and net margins if returns on new sites are slower or below expectations.
• While management is targeting over A$2 million in annualized procurement savings on top of earlier corporate cost reductions, repeated cost out programs risk reaching practical limits. This would constrain further EBITDA margin gains and leave earnings more dependent on volume sensitive tourism cycles.
• Although the company holds A$55.9 million of carried forward tax losses and has resumed paying a dividend alongside an on market buyback, prioritizing capital returns and bolt on acquisitions ahead of further balance sheet strengthening could limit flexibility if tourism growth moderates and EBITDA and earnings come under pressure.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Experience Co compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Experience Co's revenue will grow by 4.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.0% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach A$11.8 million (and earnings per share of A$0.02) by about June 2029, up from -A$38.0 thousand today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$15.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.0x on those 2029 earnings, up from -1489.5x today. This future PE is lower than the current PE for the AU Hospitality industry at 24.3x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Tourism demand into Australia and New Zealand is a key long term driver for Experience Co, so any prolonged slowdown in international visitation, weaker outbound travel from key markets like China or softer domestic holiday spending could limit visitor volumes to skydiving, reef and treetop attractions, putting pressure on revenue and earnings growth.
• The business model remains highly exposed to weather and environmental disruptions over the long run. More frequent extreme weather events, marine access constraints on the Great Barrier Reef or safety related shutdowns at skydiving and treetop sites could cap capacity utilisation and reduce average revenue per customer, which would weigh on segment EBITDA margins and net profit.
• Management plans to pursue organic growth projects, new Treetops sites, marine expansion and bolt on acquisitions funded through cash and debt facilities. If future visitor trends do not support these additions, returns on growth and maintenance CapEx of A$8.1 million and beyond could fall short of expectations, compressing free cash flow and net margins.
• The group is targeting recurring cost efficiency programs, including over A$2 million in annualised procurement savings. Over time these initiatives may reach a practical ceiling, leaving the company more reliant on continued tourism growth and pricing power to support EBITDA margin expansion and earnings.
• Experience Co is increasing shareholder returns through a fully franked dividend of A$0.0025 per share and an on market share buyback while also drawing on debt facilities for assets such as the Aquarius II vessel. If tourism growth slows or a future downturn persists, this capital allocation mix could limit flexibility, increase balance sheet risk and constrain the company’s ability to support earnings through a weak cycle.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Experience Co is A$0.15, which represents up to two standard deviations below the consensus price target of A$0.15. This valuation is based on what can be assumed as the expectations of Experience Co's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be A$157.2 million, earnings will come to A$11.8 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 9.7%.
• Given the current share price of A$0.07, the analyst price target of A$0.15 is 50.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.